Supervision of German Foundations

1. Supervision of German Foundations Hermann Falk

4. Establishement of new foundations If this trend continues the number of German foundations could grow by factor 3 or 4 within one generation.

5. Wissenschaft und Forschung 13,3% Soziale Zwecke 32,7% Bildung und Erziehung 14,9% Kunst und Kultur Privatnützige Zwecke 14,4% 5,6% Umweltschutz Andere 3,3% gemeinnützige Zwecke 15,7% Objectives 2006

6. Basic concept • Foundation = organisation owning assets dedicated to a purpose. No members and shareholders.  • Basic model = foundation established under civil law (§§ 80 – 88 BGB) with legal personality and legal capacity. Its assets must be preserved and must suffice to promote its purpose indefinitely. • Legal Framework Federal Law (§§ 80 pp. BGB) and State Laws (Landesstiftungsgesetze). Fiscal Law (§§ 51 – 68 AO/ Tax Code).

7. Different types • public benefit entity  self interest / non public benefit entity • foundation with legal personality  dependent foundation (~ trust) • foundation under civil law  public benefit limited liability company  public benefit association • foundation under public law • foundation under church law

8. Different types • Different donors such as corporate foundation, community foundation etc. • Different segments such as foundations for arts & culture, science & research, environment etc.

9. Establishment • Right to establishment based on the Civil Law and the constitutional freedom of property • Founder’s deed (Stiftungsgeschäft) plus Foundation Statute • State approval (Anerkennung) by authority (Stiftungsaufsichtsbehörde) • Quality and time depends on the specific state authority. Sometimes the process is rather lengthy and complicated, in other states customer orientated. • No minimum capital (in absolute terms) required by law. It has to be proportionate to the objectives. • Tax authority decides on tax privilege separately if only tax –exempt purposes are allowed in the Statute.

10. Internal Governance • Any Foundation needs a board (Vorstand) which can consist of one person, e.g. the founder himself. We recommend an additional body such as an advisory board (Stiftungsrat, Kuratorium etc.). • Board members are responsibly for the foundation’s activities and are liable for damage to the foundation and its assets, caused intentionally or negligently.

11. Accountability • Civil law foundations have to present their accounts to the State authority. Minimum: Report on activities and profit & loss account. • Any public benefit foundation must hand in an annual tax declaration to obtain the tax exemption.

12. State Supervision • First and foremost principle: to guard that the founder’s will is observed! Thus, the activity of the foundation board members is controlled to preserve the foundation’s existence. • Supervision is limited to the question of legality of the administrative activities. The actual program is at the board’s own discretion.

13. Information rights The Foundation has to provide: • Annual report on how the board met its duties to fulfil the founder’s will • Annual account with main financial data. Recommended is a (audited) balance sheet depending on the foundation size. • Change of board and other body members. • Other information which is necessary to realize an efficient supervision.

14. Measures of Supervision • Objections to certain board actions = authority points out that certain actions breach the law or the statute • Call to change or withdraw from this action. • If measure can not be revoked then board is asked to consider authority‘s opinion in any future case. • Cancellation of board actions • According to State law • Action becomes invalid. Board has to wind up.

15. Measures of Supervision 3. Official directives with regard to already taken actions • to refrain from certain intended actions. • Or to instruct that a certain action is taken. • If board does not obey: authority can order the substitute. 4. Administrative fine can be imposed if official directive is not followed.

16. Measures of Supervision 5. Dismissal of Board members when relevant duties are neglected (fraud etc.) • As an exception to the rule in case of gross negligence or inability to serve. • Would it be sufficient to remove the person for a limited time? • Steps: • Relevant body is asked to replace such board member within certain dead line • Replacement according to foundation’s statute. 6. Claim for compensation according to State laws. In certain states a special representative is appointed to sue for damages.

17. Licensing requirements • Basic idea: measures that burden the foundation and its assets in a considerable was have to be approved by supervising authority, such as: • Taking up a loan. • Assumption of a guarantee. • Handing out of financial allocations free of charge and beyond the public benefit purposes. • Selling / redistributing the assets in a way that would limit the foundation’s financial ability, e.g. > 20 %. • Changing the Statute. => Legal transaction is provisionally invalid until authority has approved.

18. Other Measures Changing the Statute or Termination • Ultima ratio in cases if purpose can not be persued anymore or if public benefit is in danger. Fees • All authority measures are subject to fees. However, most state laws liberate public benefit foundations from these fees.

19. Legal Protection/ Redress • Any official directive and other measure is considered as an administrative act. Thus, the foundation can object an pursue an opposition proceeding. • Filing such an opposition has suspensive effect in principle. • In case that the authority has neglected its official duties the foundation can demand compensation. For example: authority knows that financial danger is on the way but does not take any actions.

20. Thank you very much! Dr. Hermann Falk Bundesverband Deutscher Stiftungen e.V. Mauerstraße 93 10117 Berlin www.Stiftungen.org